spirit final presentation
TRANSCRIPT
Analyst ReportJune 2016
Announcement
“Ladies & Gentlemen, thank you for traveling with Spirit Airlines.
We are now 30,000ft high. Please remain buckled up and enjoy the ride…
Our friendly flight attendant will start serving you in just a moment. “
Open
Spirit Airlines – Company Description
§ ULCC Pricing Model
§ “Bare-bones” fares
§ Additional fees for all other services
Open
Pricing Model
§ Unbundled fares
§ $9 Fare Club
§ Non-reclining seats
§ Additional charge for carry-on bags ($25-50) and check-in bags ($20-45)
§ Big Front Seat - extra width and legroom
Open
Pricing Model Open
Open
Consumer dissatisfaction ranges from:
§ outrage over the airline’s hefty add-on fees
§ no-exceptions policy
§ crammed seating.
OpenUnapologetic Management
OpenUnapologetic Management
1st minute
Customer Satisfaction Open
Top 10 most hated companies in the U.S. 1
1 Based on 24/7 Wall St “America’s most hated companies” as of 14th January 2016. 2 Based on American Customer Satisfaction (ACSI) Index 2016
Customer Satisfaction Benchmark by Airline Industry 2
Customer Satisfaction Open
Airline IndustryTHE AIRLINE INDUSTRY
HELPS DRIVE NEARLY
$1.5 TRILLION INU.S. ECONOMIC ACTIVITY COMMERCIAL AVIATION
HELPS DRIVE MORE THAN
11 MILLION JOBS IN THE U.S.
U.S. GDPCONTRIBUTION OF
5%
+122% REVENUE GROWTH IN 2015TOTAL $ 18.92 BILLION NET INCOME
696 MIILION DOMESTIC PASSANGERS
MORE THAN 50 Airlines
Forceasted growth rate of 1.9% CAGR until 2035 1
1 Based on estimation of the Federal Aviation Administration (FAA Aerospace Forecast Fiscal Years 2015-35)
Economic Environment
0.6% 0.4%
3.2%
5.8%
16.6%
5.32%
13.74%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
12.6%
12.8%
13.0%
13.2%
13.4%
13.6%
13.8%
14.0%
14.2%
2011 2012 2013 2014 2015 2011-2015Avrg.
U.S. Airlines S&P 500Sources: Standard and Poor’s (S&P), Airlines for America (A4A), Bureau of Transportation Statistics and Oliver Wyman: Airline Economic Analysis
Six Years Post-Recession, Pre-Tax Profit Margnis of U.S. Carriers
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Competitive Environment
79.24%
13.52%
7.24%
Big 4 Mid-tier / Hybrids ULCC
Total Domestic Market Share (RPM) – Spirit Peer Group
We define Spirit Peer Group as follows: Big 4 = American, Delta, Southwest & United< Mid-Tier/Hybrids = Alaska, JetBlue, & Virgin America, ULCCs = Allegiant, Frontier, & Spirit
Very large carriers with that are in a very mature phase of their growth cycle
Smaller carriers than the Big 4 trying to attract premium yields with their product offerings
Carriers with Ultra-Low Cost structures designed to compete on the basis of price(price leader approach)
• ULCCs’ Share of the U.S. Domestic Market is expected to Increase Significantly
• INPUT
• https://skift.com/2016/01/14/u-s-legacy-carriers-vs-low-cost-rivals-in-8-charts/
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Expanding Markets
§ Spirit has the abilility to grow in profitable markets.
§ Just expanded our Latin American routes.
§ The “Spirit Entry Effect” is real - the number of additional travelers after we enter a market generally increases enough for us achieve an 85% or greater load factor without taking share from other carriers.
§ Spirits untapped market is growing as their cost structure improves. (Lower-income&Frugal Flyers)
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Underserved Market
§ A Large base of frugal flyers looking for the cheapest base fair.
§ These flyers are hit with a multitude of unexpected costs creating averseness among customers.
§ Customer retainment has not been well addressed with Spirits current operations.
§ Currently, this has not proved to be a problem considering the observed growth in Spirits sales.
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Turning Point?
§ Slump in revenue growth in 2015
§ Stock price plunged from $74 in early 2015 to $40 at year-end
§ CEO Ben Baldanza sacked
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“Number one, cash is king […]”
Jack Welch
Financial Performance Open
Operating Performance
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
1,000,000
2,000,000
3,000,000
2011 2012 2013 2014 2015Passenger Non-ticket Operating Profit Margin Sales Growth Operating Expenses
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Revenue Distribution
Passenger55%
Non-ticket45%
Passenger92%
Non-ticket1%
Special revenue adjustment
1%
Other6%
Spirit Airlines Southwest Airlines
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Sales Growth
Income Margins(2015)
37.11%
23.08%25.49%
16.76%
10.87%
22.66%
29.36%
9.13%
3.58%5.12%
6.53%
10.74%
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 Average
Spirit Airlines Southwest Airlines
14.81% 11.03%
Open
13.5% 13.2%
17.1%18.4%
23.8%
17.2%
4.4% 3.6%
7.2%
12.0%
20.8%
9.6%
2011 2012 2013 2014 2015 Average
Spirit Airlines Southwest Airlines
Operating Profit Margins Open
16.5%
11.8%
15.0%14.2%
12.5%14.0%
1.0%2.3%
3.9%
5.8%
10.2%
4.6%
2011 2012 2013 2014 2015 Average
Return on Total Asset
Spirit Airlines Southwest Airlines
Strong Financial Performance Open
Investment in Flight Equipment
§ Massive investments in Flight Equipment in 2014 & 2015
§ Southwest already has established a much larger fleet
Open
§ Why the ROA declines?
Expansion
PP&E investment
Balance Sheet analyses
Strong Financial Performance Open
Short Term Solvency
1.95 1.98 1.93 1.97
2.2
0.87 0.810.7 0.61
0.5
2011 2012 2013 2014 2015
Quick Ratio
Spirit Southwest
CFFO Investing Acitvities Finance Actitvities
Cash Flow Analysis
§ Strong operative results and high clash flow margin
22.1%
16.3%
10.3%
§ High capital expenditures into flight equipment
§ IPO in 2011 ($170mn.)
§ Nearly no changes in the capital structure between 2012-2013
§ Leveraged finance with long-term debt of 14 new airplanes 2014 ($536mn.)
§ Repurchase of common stock since 2015 ($112mn.)
§ No dividend payments
Cash Flow Analysis
343.328 416.816530.631
632.784
803.632
-800
-600
-400
-200
0
200
400
600
800
1000
2011 2012 2013 2014 2015
CFO Investing Cash Flow Finance Cash Flow Closing Cash Balancein $k
Conclusion
Market Profitability Liquidity
§ High generic market growth and positive future forecast
§ Establishing of a market niches due to a unique pricing model and generating new customers without taking away these from existing airlines
§ Strong increase in all operating KPIs and the ability of the firm to generate cash from sales
§ High growth potential due to expansion of fleet and optimization in CASM (Cost of available seats per mile)
§ Operating expenses are increasing at a slower rate than sales
§ No threat of short-term bankruptcy
§ Effects from long-term debt and leasing obligations in the future on liquidity creates uncertainty
✔ ✔ ✔